Buyout Shops Smile About Dental Deals

American Securities at press time appeared poised to buy Atlanta-based dental clinic chain Kool Smiles PC Inc. from Friedman Fleischer & Lowe in the latest example of a buyout firm trying to tap into the highly fragmented and growing dental market.

The Federal Trade Commission on Oct. 29 gave the The New York-based firm early termination of antitrust review to proceed with the acquisition. Executives at both firms didn’t return requests for comment, but Bloomberg reported Oct. 4 that American Securities was the lead bidder on the company with an offer of about $700 million.

Meanwhile, on Nov. 3, Welsh Carson Anderson & Stowe announced it had agreed to buy Smile Brands Group Inc., an Irvine, Calif.-based company that provides support services to dental groups, from Freeman Spogli & Co. On Oct. 5, Leonard Green & Partners bought Aspen Dental Management Inc., a Lockport, N.Y.-based dentist chain, from Ares Management LLC. And back in January, The Jordan Company LP bought Zest Anchors Inc., an Escondido, Calif.-based company that makes attachments used to secure dentures and other dental implants.

Buyout shops are drawn to the industry because it is large, growing and highly fragmented, letting them purchase companies and use them as a platform for growth with add-on acquisitions and organic growth initiatives, said Fred Simmons, a partner at Freeman Spogli. “The wind is at your back.”

Americans are spending more on dental care than ever before, often from small dental practices. Expenditures for dental care in 2005 were approximately $82.5 billion, achieving a compound annual growth rate since 1990 of 6.6 percent, according to data from the Centers for Medicare and Medicaid Services that Simmons cited. Of the 176,000 dentists practicing in the United States, 63 percent are sole practitioners, 21 percent are run by two dentists, and only 16 percent are run by three or more dentists, Simmons said.

This means there are plenty of targets out there that could save money through scale via consolidation, Simmons said. At the same time, dental practices don’t face the same reimbursement risks that some health care investments do, he added.

Founded in 2002, Kool Smiles offices are built “for children and adults to have a fun and enjoyable dental experience,” according to the company Web site. The company touts its brightly colored, oversize waiting areas that include children’s play areas. If the deal proceeds, American Securities would invest out of its fifth fund, according the FTC filing. American Securities closed that fund at $2.3 billion in 2008.

Simmons, of Freeman Spogli, said his firm would achieve a “solid double-digit return” on its equity investment of $112 million in Smile Brands in 2005.

Most of these latest deals underline another trend prevalent in private equity right now, that of sponsors trading companies in so-called secondary deals. In fact, Welsh Carson Anderson & Stowe would be Smile Brands’s third private equity owner since 1998. Freeman Spogli bought the company from Gryphon Investors. Leonard Green is also the third private equity owner of Aspen Dental, which Gemini Investors bought in 1999 before selling to Ares Management in 2006.